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Start Time: 16:33

End Time: 17:30

Hot Topic, Inc. (HOTT)

Q3 2012 Earnings Call

November 14, 2012 4:30 pm ET

Executives

James McGinty – Chief Financial Officer

George Wehlitz Jr. – Vice President - Finance

Lisa M. Harper – Chairman of the Board, Chief Executive Officer

Analysts

Janet J. Kloppenburg – JJK Research

Thomas A. Filandro – Susquehanna Financial Group, LLLP, Research Division

Jeff Van Sinderen – B. Riley & Co.

Dana Telsey – Telsey Advisory Group

Adrienne Tennant – Janney Capital Markets

Presentation

Operator

Good afternoon, ladies and gentlemen. Welcome to the Hot Topic Third Quarter 2012 Earnings Conference Call. At this time all participants have been placed on a listen-only mode and the floor will be opened for your questions following the presentation. This call will be limited to one hour.

Before we begin, I would like to remind you that during the course of this conference call, the company will be making certain forward-looking statements, such as statements relating to financial results, guidance and future financial performance, merchandise assortment, new initiatives and related matters and statements relating to key personnel and operational issues.

These statements, as well as related information posted on the Hot Topic Investor Relations website, involve risks and uncertainties that may cause actual results to differ materially from those projected in the forward-looking statements. These risks and uncertainties are discussed from time-to-time by the company and are more fully set forth in the periodic reports that Hot Topic files with the Securities and Exchange Commission, including the most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q.

All forward-looking statements made on this call speak only as of the time they are made, and Hot Topic undertakes no obligation to update these statements to reflect subsequent events or circumstances.

To more effectively disseminate the information discussed this afternoon, this call is being webcast on the company’s Investor Relations website at http://investorrelations.hottopic.com, and replay will be available on that site. A replay will also be available at 888-286-8010, passcode 60862559, for approximately 2 weeks.

Now, I’ll turn the call over to Hot Topic’s Chief Financial Officer, Jim McGinty.

James McGinty

Hi, this is Jim, and welcome to the call. While on hold, you’ve been listening to I will wait by Mumford & Sons. My partners on the call today are Lisa Harper; Mark Mizicko; and George Wehlitz. George will begin by reviewing the third quarter results and making a few comments on the balance sheet.

Following Q3 details, Lisa will provide you with her thoughts on the third quarter performance and the outlook going forward. Lastly, we will discuss guidance. Now, I’ll turn it over to George.

George Wehlitz

Thanks, Jim. All comparisons discussed are to the same period from a year ago unless otherwise noted. Overall, total net sales for the third quarter increased 2% or $3.6 million. The components of this increase are as follows: $6.8 million sales increase from new and non-comparable Hot Topic and Torrid stores; $300,000 sales gain from Hot Topic and Torrid comparable store sales increases of 0.1% and 25% respectively. And lastly, a $3.5 million sales decrease from closed stores and other.

Hot Topic Division had an average transaction value increase of 12%, but the number of comparable transactions were down 11% last year. Torrid had an 8% increase in the average dollar sale with a 7% decrease in the number of transactions.

At Hot Topic, apparel was 59% of total sales for the quarter, compared to 54% last year. At Torrid, apparel was 78% of total sales for the quarter compared to 74% last year.

Gross margin was 35.8% of sales, compared to 33.9% last year. The 190 basis point increase breaks down into the following categories: 170 basis point increase in merchandise margin primarily due to higher realized mark-up as we significantly increased the number of internally designed products and the decrease of Internet sales.

30% basis point decrease in store depreciation expenses due to lower expense from comp stores and stores closures, 10% basis points decreased in distribution center expenses primarily a result of the lower depreciation, supplies and leverage on higher sales partially offset by higher freight costs. 10% basis point increase in store occupancy expense primarily due to higher rent as a result of increase in number of stores, and a 10% basis point increase in the buying payroll expenses.

In the third quarter, selling, general and administrative expenses were 32% of sales, compared to 31.5% last year. The 50 basis point increase breaks down into the following categories. Performance based bonuses increased 150 basis points, pre-opening expenses increased 20 basis points due to greater number of new relocated and remodeled stores opened in the third quarter of 2012.

Total payroll expenses increased 10 basis points as a result of an increase in number of stores and higher store performance based bonuses. These increases were partially offset by an 80 basis points decrease primarily due to lower store costs from utilities, supplies, debit/credit card processing fees and telecommunications.

A 50 basis point decrease due to lower other G&A is due from depreciation, asset impairment write-off, travel and telecommunication expenses partially offset by increase in computer maintenance cost. The third quarter operating income was $6.9 million versus $4.2 million last year, an increase of 62%.

Our effective tax rate was 37.8% versus 27.8% last year. Last year included a benefit recorded for expiring statutes of limitations. Our resulting net income for the third quarter was $4.3 million or $0.10 per share versus $3.1 million or $0.07 per share last year, an EPS increase of 43%.

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